Walmart chickens out but Tesco makes leap of faith with Tata Trent

Shares in India’s Trent surged 8 percent in opening trade after retail giant Tesco said on Tuesday it had applied to buy a 50 percent stake in the company’s unit, Trent Hypermarket Ltd.

The world’s third-largest retailer, which already has a franchise agreement to provide support to Trent’s Star Bazaar chain, has made an application to India’s Foreign Investment Promotion Board and plans to invest $110 million ( Rs 680 crore). Under rules framed in September last year when the UPA government decided to allow FDI in multi-brand retail, foreign investors were required to invest at least $100 million in the retailing venture.

Trent Hypermarket runs a discount hypermarket format under the brand name Star Bazaar. Currently there are 15 Star Bazaar stores in the country: three in Mumbai, four in Bangalore, two in Ahmedabad and Pune, one each in Aurangabad, Surat, Chennai and Kolhapur.

For Tesco, the deal is an extension of existing relation with Tatas in the retail sector. It is already a wholesale supplier of merchandise to Star Bazaar. Welcoming Tesco’s India plans, Commerce Minister Anand Sharma said Tesco’s India investment will help transform India’s retail sector.

“A marquee name like Tesco would mean an endorsement for destination India,” Arvind Singhal, chairman of retail consultancy Technopak Advisors, was quoted as saying by the Business Standard.

Here is all you need to know about the deal:

1. Tesco will become the first foreign chain to invest in supermarkets in India since FDI was allowed in the retail space last year. It would even steal a march over global rival Walmart which split up with Bharti Enterprises two months ago.

2.The retailer has applied to India’s Foreign Investment Promotion Board for permission for an initial $110 million investment in the Tata Group’s retail business Trent Hypermarket Limited.Tesco has proposed an equal joint venture with its existing partner, Trent, a Tata group company, to open stores initially in Maharashtra and Karnataka. So basically, the proposed partnership will operate and build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka only, as the other two states where Star Bazzar is present— Gujarat and Tamil Nadu— have banned foreign investment in retail.

3. The UK-based retailer will trade in products under 14 categories, including cereals, tea, coffee, spices, flour, vegetables and fruits, meat, fish and poultry, sweetmeat, bakery and dairy products, soft drinks, ice-creams, wine and liquor, textiles, footwear, crockery, furniture and electronic equipment among others and plans to open three to five stores every financial year.

4. The current market capitalisation of Trent stands at Rs 3,825.28 crore. The company has reported standalone sales of Rs 280.14 crore and a net profit of Rs 15.6 crore for the quarter ended September 2013. Currently Trent Hypermarket has a franchise and a wholesale supply arrangement with Tesco and its wholly-owned Indian subsidiary, Tesco Hindustan Wholesaling Pvt Limited, respectively. The exclusive franchise agreement grants Star Bazaar access to Tesco’s retail expertise and technical capability. Trent at present operates Westside, a fast growing chain of retail stores. The company has 74 Westside departmental stores.

5. Trent vice-chairman Noel Tata said: “The application is a positive step forward in the relationship between the Tata group and Tesco. We believe that our understanding of the Indian market coupled with Tesco’s unparalleled global retail expertise will allow us to leverage the tremendous potential of the market to the benefit of all stakeholders.”

6.Tesco has stores in countries such as China, South Korea, Thailand, Malaysia, Poland, Hungary, Ireland, Slovakia, Czech Republic and Turkey. Tesco was formed in 1919 by a Polish emigrant Jack Cohen who started selling groceries from a stall in Hackney in London’s East End.

7. In September last year, the government had allowed 51 percent FDI in the sector with certain riders like mandatory sourcing from Indian SMEs and investment in back-end infrastructure. Due to the conditions, global retailers, including US-based Walmart and Tesco had refrained from sending formal proposals to the government. Following its meetings with both domestic and international retailers, the government in August 2013 eased the norms to make the segment lucrative for retailers.